Mark Florman steps out of his temporary office just four hours into his new role as the head of the British Private Equity and Venture Capital Association with his to-do list in hand. He leads the way into a neighbouring meeting room for a working sandwich lunch.
“I’m going to start by commenting on the big picture, if I may,” he says, having settled into a chair. “The UK and Europe need to compare themselves to the high-growth markets – the likes of Brazil, Mexico, Turkey and Indonesia – and look at the way these country’s governments and industries are driving growth.”
Florman, a former banker, private equity professional, policy maker and philanthropist, brings a particularly international viewpoint to the BVCA, the UK’s trade body for private equity and venture capital. He stepped back from his latest venture, a first-time fund currently being raised with Sir Bob Geldolf, to invest in African businesses, to succeed Simon Walker as the BVCA’s chief executive. Florman remains connected with the fledgling African fund, named 8 Miles, as a non-executive vice chairman.
The UK and Europe need to compare themselves to the high-growth markets – the likes of Brazil, Mexico, Turkey and Indonesia – and look at the way these country’s governments and industries are driving growth
Florman expands on his reference to the fast-growth emerging markets by listing off a number of priorities for the governments – both in the UK and Europe – to consider: a renewed culture of savings; a flexible approach to the job market and immigration; more encouragement for capital into long-term investments; “embracing” engineers and scientists to ensure we are at the forefront of innovation. Private equity and venture capital, he adds, should be allowed to play its part.
On this note, Florman addresses the regulatory landscape and the risk that new rules will stem the industry’s ability to play a part in economic recovery. “If I was looking down from on high and witnessed how we are starting to regulate and legislate this industry, I’d have to ask whether we had missed the point.”
He is referring primarily to the Alternative Investment Fund Managers directive in the European Union. The directive, which was passed by EU legislators late last year, will impose new reporting requirements on funds, set restrictions on “asset stripping” and introduce stricter depositary guidelines. It will also affect the way in which funds can market their vehicles across the 27-member bloc.
“I want to make sure that EU and UK governments realise that private equity and venture capital can be mobile, especially if you are starting a general partner from scratch,” he adds. The attractiveness of the UK and Europe as bases for private equity and venture capital GPs is still strong, says Florman. 8 Miles, his recent Africa-focused venture, for example, has chosen to base itself in London.
High on his list of priorities, therefore, is to make sure the UK retains this position as a leading centre for managers. Part of this task is to ensure that the tide of regulation is kept at bay. “Private equity probably does not need many of the further layers of regulation being planned,” he muses. “It is already one of the best-regulated industries in the world: the LPs regulate the GPs.”
Florman is adamant that private equity firms have nothing to hide. Does his background at Doughty Hanson, a firm which is well-known for taking a leading position on communications and responsible investment where he spent 8 years, mean he views the world of private equity through slightly rose-tinted spectacles? Some firms have been very slow to take up, for example, the voluntary disclosure rules in the Walker Guidelines.
“It takes time,” Florman concedes, referring to the cultural shift required for firms to report business activity to external stakeholders. “If you are in the private equity industry, you focus your attention on running the portfolio companies on behalf of your investors, and you report to them continuously and obsessively and in accordance with the terms of the governance mandate agreed with them.”
On the subject of LPs regulating GP behaviour, Florman comments that the Private Equity Principles, the guidelines issued by the International Limited Partners Association which outline best-practice fund terms and conditions, have made a contribution to the industry, but that he is not in favour of standardisation of terms. The BVCA is unlikely to follow suit with its own guidelines. “A number of initiatives have happened to see if standardisation [of terms and conditions] can happen. I don’t think it can, because you risk missing out on the ability to develop a bespoke fund for a specific market,” he says. “We are looking at how terms can be worked within a framework, but I wouldn’t go any further than this.”
Part of drive for regulation in Europe is a desire to curb the “systemic risk” posed by the various financial actors in the market. Private equity, says Florman, is “counter systemic”. “Each investment is self-contained within itself and the fund.”
Nevertheless, has the way in which private equity has used leverage posed certain systemic risks? “The word leverage is misunderstood and has been used inappropriately,” responds Florman. “In this sense, public and private companies do exactly the same thing: try to arrange the capital structure of their business appropriately.” He goes on to describe the way in which private equity managers tackled debt levels in their portfolios during the downturn, with “vigour and attentiveness”.
“The term ‘leveraged buyout’ – while there is nothing wrong with it – is inappropriate. It puts too much attention on the capital structure,” he says.
Florman’s job will clearly involve moving the wider community’s focus away from capital structures and towards the private equity governance model, which, he says, is the most effective way of building sustainable businesses. “As we move through the recession, we are starting to see that private equity-backed businesses are better prepared for downturns and the governance model means that by definition these are better, more sustainable businesses.” He talks in detail about ESG (environmental, social and governance) issues and how well-positioned private equity owners are to address these.
Florman summarises the BVCA’s short-term objectives. The first was already well underway and involves pushing the UK government to focus on venture capital as a way of “waking up” the UK economy. The chancellor’s budget announcement, due on 23 March, will hopefully pick up on this, he says. “I’m sure we have done our best to represent our industry.”
The second priority was to ramp up communications efforts around ESG matters – both in widely communicating the success stories to come out of the private equity industry and in helping BVCA members to better understand ESG best-practice.
The third priority was a general rethink of the way the BVCA communicates, including the language it uses. “At the moment we don’t explain what we do in plain enough English. We are part of British and European industry, yet our communications are still too technical,” he says. “Limited partner is an inappropriate catch-all moniker: our investors are pension funds, sovereign wealth funds, endowments, families and insurance companies.”
Priority four was to recruit more limited partners into the association, to open them up to the asset class. “There are many local authorities in the UK which have yet to commit to private equity,” he says.
As the meeting wraps up, Florman apologises for sounding too passionate about the positive power of private equity. In his new line of work, this should not be a problem.